Mergers and Acquisitions Playbook

MARK A. FILIPPELL is a co-founder and Managing Director at Western Reserve Partners, an M&A boutique. He has nearly thirty years of investment banking experience and has personally completed over 125 merger and acquisition transactions. Prior to co-founding Western Reserve Partners, he was the manager of the Mergers & Acquisitions Department at KeyBanc Capital Markets and McDonald Investments. His clients have included Eaton, Novar Electronics, Claymont Steel Holdings, Liqui-Box, General Electric, Computational Systems, Excel Mining Systems, and MascoTech.

• Preface xiiiAcknowledgments xviiChapter 1 Why People Sell Businesses 1Honesty Is the Best Policy 2Most Common Reasons People Sell 4Retirement 5Differences among Co-Owners 5Illness or Death 6Change in Strategic Position 7Financial Sponsor Liquidity Event 8Financial Pressure 9Unsolicited Offer 9Proactively Making the Sale Decision 10Notes 11Chapter 2 Should the Seller Hire an Intermediary? 13What Do Investment Bankers Do, Anyway? 14Criteria for Selecting an Investment Banker 19General M&A Experience 19Specific M&A Experience 19Marketing Philosophy 20Contacts 20Temperament 22Investment Banker Fees 23Choosing the Right Investment Banker 29Notes 32Chapter 3 What Is the Business Worth? 33Valuation Methodologies 34Book Value 34Multiple of Some Measure of Earning Power or Cash Flow 36Intangibles Such as Technology or Market Position 38The Synergy a Seller Could Provide a Buyer 39Applying Valuation Theory to Real-World Situations 42Cases Where Dividing the Business Created Value 43Cases Where a Strategic Buyer Unlocked Value 47Notes 50Chapter 4 The Difference between “Value” and “Currency” 51Mediums of Exchange in M&A 52Cash 52Notes 52Stock 54Stock Options 56Contingent Payments 57Sale of a Company’s Stock 59Notes 61Chapter 5 Taking Advantage of the Seller’s Unfair Advantages: Prepping and Timing 63Preparation 64Environmental Issues 64Lawsuits 66Tidy up the Financial Statements 67Cosmetic Issues 68Web Site Upgrades 68Management Changes 68Timing 71Long-Term Timing Dimension 71Short-Term Timing Dimension 73Involving the Management Team 75(Not) Involving Company Employees 80Informing the Workforce 81Dealing with Leaks 82Conclusion 86Notes 87Chapter 6 Preparing the Documents 89The Offering Memorandum 90Executive Summary 91Industry Description (Optional) 92The Business 92Financial Review 100Exhibits 103The Executive Summary 106The Management Presentation 110The Data Room 112The Definitive Purchase Agreement 116Notes 116Chapter 7 Identifying and Cultivating the Right Buyers 117Strategic Buyers 118Financial Sponsors 125Diversification Parties 132Employee Stock Ownership Plans 133Management 136Family Members 139Notes 141Chapter 8 How Many Buyers to Approach? 143Negotiated Sale 144Limited Auction 150Broad Auction 152Notes 155Chapter 9 Approaching Prospective Buyers 157Confidentiality 158Distributing the Offering Memorandum to Buyers 165Securing Buyers’ Indications of Interest 168Appendix 9A: Confidentiality Agreement 174Appendix 9B: Sample Process Letter 179Appendix 9C: Indication of Interest 181Notes 183Chapter 10 Management Presentations and Plant Tours 185Management Presentations 186Management Presentation Blocking and Tackling 186Practice Makes Perfect 189Management Presentation Pitfalls 189Facility Tours 190Next Steps 193Notes 194Chapter 11 Negotiating the Purchase Price 197The Letter of Intent 198Case-Specific Negotiating Strategies 201Case 1: One Clearly Superior Offer 202Case 2: Four Comparable Offers 204Case 3: A “High Price with Tough Terms” Offer versus a “Lower Price with Reasonable Terms” Offer 206Case 4: Three Offers with High Prices and Tough Terms 207Case 5: One High Price Offer with Tough Terms 208Case 6: Six Offers with Different Forms of Consideration 209Case 7: Five Offers with Different Legal Structures and Different Forms of Consideration 213Negotiating Dynamics 215Appendix 11A: Letter of Intent 217Notes 223Chapter 12 Moving from Letter of Intent to Closing 225The Negotiating Dynamics Have Reversed 226Exclusivity 226Maintaining Performance between the LOI and Closing 227Negotiating Out the Purchase Agreement 229Buyer Due Diligence 230Hart-Scott-Rodino Filing 232Keeping the Closing Process on Track 234What if It’s Not Meant to Be? 237Seller’s Exposure if the Buyer Does Not Close 237Interim Milestones and Backup Buyers 238Appendix 12A: Definitive Purchase Agreement 240Notes 247Chapter 13 Sales Forced by Bankruptcy or Financial Duress 249The Painful Decision to Act 250Time Is of the Essence 251Senior Lender Dynamics 252Secured Party Sales 256Sales Engineered before Filing, but Closed in Bankruptcy Court 257Sales Engineered and Closed in Bankruptcy Court 259Notes 267Chapter 14 Working with Lawyers 269Legal Involvement from Day One 270The Lawyer’s Distinct Role 270Deal Makers versus Deal Breakers 271Retaining the Right M&A Lawyer 272The Legal Check-Up 274Collaborating with the Investment Banker 274Drafting and Negotiating the Purchase Agreement 275Effective versus Ineffective Lawyering 278Managing the M&A Lawyer 280Appendix 14A: Seller’s Attorney Pretransaction Checklist 281Note 288Chapter 15 After the Sale Has Closed 289Post-Closing Immediate Cooperation 290Employee Notification 290Customer Notification 291Supplier Notification 292General Public Notification 292The Month Following Closing 293Alternative Notification Methodology 293Post-Closing Subsequent Matters 295Post-Closing Hubris 296Post-Closing Legal Matters 297Post-Closing Financial Matters 298Taxes 299Charitable Giving 300Investments 303New Horizons 304Leveling the Playing Field 305Notes 305About the Author 307Index 309